A welfare recipient receives $10,000 in benefits when he does not work but receives an income of $15,000 when he works part-time and earns $6,000 in wages.What is the implicit marginal tax rate the recipient faces?

Question

Quizplus · Accepted Answer

The implicit marginal tax rate is calculated by the reduction in benefits as a result of earning income. Here, the recipient loses $10,000 in benefits by earning $6,000 in wages, resulting in a net gain of $4,000. The implicit marginal tax rate is the loss in benefits ($10,000) divided by the wages earned ($6,000), which equals 166.6%. However, since the question likely meant to ask for the rate on the additional income that results in the net gain (i.e., the effective marginal tax rate on the part-time income that leads to a total income of $15,000), the calculation should consider the net increase in total income ($5,000) from not working to working part-time. Thus, the correct calculation for the implicit marginal tax rate should be based on the additional income earned beyond the benefits lost, which is not directly provided in the options given. The provided answer choice D) 16.6 percent seems to be a misinterpretation of the calculation required. The correct approach involves understanding the relationship between lost benefits, additional income, and how they affect the recipient's overall financial situation, which was not accurately captured in the explanation.

A Welfare Recipient Receives $10,000 in Benefits When He Does